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SC State must stop diverting money to foundations, report says

S.C. State University, struggling with a $13.6 million deficit, sent $2.3 million in rebates from contract vendors to a pair of school foundations in recent years -- a practice that a state watchdog asked the school to stop in a report issued Tuesday.

Money from contracts to any state agency should not go to foundations with no legislative or public oversight, the state Inspector General said in the report. Extra payments on S.C. State’s food-service contract ended up costing students an extra $343 a year on their meal plans, the report said.

“This practice of diverting state funds, generally termed rebates, to foundations is inappropriate and needs to cease,” the report said.

They also created an perception of graft, the report said: “What image goes through most people’s minds, particularly taxpayers, when a contract term states, ‘a $200,000 unrestricted partnership gift on the first day of the contract?’ ”

This is the second report from state Inspector General Pat Maley issued this year criticizing the state’s only historically black public college for diverting money. A report in April found the school, which is on probation with accreditors, borrowed $6.5 million from a community program to cover deficits in previous years. The school is repaying the loan.

In the most recent report, Maley’s office found the S.C. State University Foundation, which spends money on student scholarships, also paid for travel, consultants, flowers, entertainment, meetings and country-club memberships. The report did not say who received or requested the expenditures.

A second foundation, the S.C. State University Advancement Foundation, was created in 2005 to handle money generated by contracts, the report said. That foundation provides salary supplements to administrators, including $50,000 in deferred compensation awarded to school President Thomas Elzey last month after he received a positive performance review from trustees.

S.C. State, hindered in recent years by falling enrollment, said it was doing nothing different than other public universities in South Carolina. But the school promised to make changes.

“We concur with the (Inspector General) that such practices at statewide institutions of higher learning may create a perception that total transparency is lacking,” the S.C. State statement said. “Moving forward the university will apply best practices to enhance transparency and accountability.”

The Inspector General’s report said vendor contract rebates were “common practice” at public colleges across South Carolina but did not say if other schools sent any money to foundations.

“One witness with broad experience said universities seem to be driving this practice rather than vendors,” the Inspector General’s report said.

The University of South Carolina spends extra money, including profiting sharing, from contracts on uses related to work by the vendors, school spokesman Wes Hickman said. Food service money, for instance, goes back to work related to the feeding students, he said. The money does not go to USC’s foundations, he said.

Still, the Inspector General’s report questioned rebates going to the university since vendors pay for projects unrelated to the contracts. A S.C. State food-service agreement includes $5 million to go toward a wellness center. The report noted the college asked the General Assembly this year for $5 million to repair a boiler system.

“The diversion of these funds removes transparency in the expenditure of these funds, as well as allows the use to be determined without competing in the normal university budgetary framework with other university business needs,” the report said.

S.C. State’s agreement with UGL-Unicco for maintenance work included $1 million for projects of the school’s choice, the report said. In addition to the $5 million for a wellness center, the school’s food-service deal with Sodexo included: a $200,000 gift to the school on the first day of the contract; $350,000 annual contribution thereafter; $800,000 for upgrades on campus; and $710,000 to makeover dining halls.

Schools should not clutter contracts with side agreements, the report said, and they “get back to old fashion management of driving a hard bargain and then making sure you get what you paid for.”

But the Inspector General’s report took issue mainly with S.C. State sending money to the foundations. The review started after the S.C. State Advancement Foundation did not provide a detailed financial statements to an outside external auditor in 2012 and 2013, the report said.

The school spent $2.3 million of $11.1 million in rebates from food service, maintenance, beverage, bookstore and health insurance contracts to foundations between from 2010 to 2013, the report said.

S.C. State had problems handling the money. The university lacked oversight over the rebates -- failing to notice that three vendors did not to make $323,000 in payments. Rebates to school foundations, totaling nearly $400,000, continued despite a former S.C. State president stopping the practice in 2012, the report said.

The Inspector General suggests S.C. State establish a policy to send all rebates to the school, not its foundations and have the foundations return all vendor money to the college. In addition, the General Assembly should require state agencies to disclose rebates from vendors and not send any money to foundations or other outside group unless spelled out by law.

To aid S.C. State through the financial crisis, the state loaned the school $6 million to pay $3.5 million to vendors, $1.2 million for payroll, $246,000 for debt payments and $519,000 for utilities after the $13.6 million deficit became public this year. The state asked S.C. State to use $500,000 of the loan to hire a financial consultant.

S.C. State trustees are working with Elzey to slice the school’s budget. The college has cut 180 employees and trimmed spending, including on employee cell phones, but has not approved a new spending plan for the budget year that started July 1. The school is operating on the previous year’s budget plan.

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